Changing our ‘mood’

Last Wednesday Moody’s published its new rating for foreign and local currency government bonds, which were downgraded from A1 to A2. Among other things Moody’s stated that it “believes that Malta’s real economy (my italics) is susceptible to contagion from the euro area debt crisis given the country’s small open economy and its reliance on external demand and tourism.

I sincerely hope that the Moody’s report serves us to rethink the way we manage the economy- Lawrence Zammit

The impact of such a possible shock would arise from second-round effects given that the primary blow would be felt by core European countries, which represent Malta’s main trading partners and tourist markets.

A number of considerations arise from Moody’s report. However, I will restrict myself today to the reference that Moody’s makes to the “real economy”. Admittedly this is a term that is being used frequently to make a distinction between the fundamentals of an economy like productivity and income earning activities and aspects that are simply a reflection of events in financial markets such as share prices. However, the fact that a credit rating agency makes such a distinction is itself indicative of the fact that we need to go beyond things like bond spreads, derivatives, short selling, etc.

These do not create wealth, as it is the real economy that creates wealth in a country. Similarly, if we were to look at an individual company, one recognises that a company’s strength lies in its ability to maximise profits and not its share value.

In this context Moody’s believes that given the high level of openness of our economy and the exposure of our economy to the core European economies such as Germany, France and Italy, our real economy may end up suffering as a result of the situation in the eurozone.

So far this does not seem to be happening in any significant way, as the results for the second quarter show that during April to June 2011 the economy grew by 2.8 per cent in real terms when compared to the same quarter last year. The growth in GDP shows that the real economy is working, especially since a significant contributor to this growth were exports of goods and services.

The argument may be that we are achieving growth but we are not doing much to control public debt. This debt will one day have to be repaid, and this would in turn has an impact on our economy.

In effect this is a point that I have been insisting on for the past weeks. The level of public debt is an issue that we have to grapple with. And I believe that, if we wish to send a very clear signal to investors, we need to introduce the concept of a balanced budget in our legislation.

Moreover, to achieve a balanced budget we cannot resort to the usual tactics of reducing public expenditure and increasing taxation. We need to create a balanced budget by adopting policies that bring about further economic growth, while at the same time ensuring a fair distribution of income.

To achieve further growth we may just need to realign some of the public expenditure. We would need to eliminate waste in the public sector and simplify certain legislation that affects the business sector and remove any red tape that is serving no purpose other than to inhibit investment.

We need to get better value from our investment in education. We need to have strategies whereby we export more Maltese work and not more Maltese workers.

I sincerely hope that the Moody’s report serves us to rethink the way we manage the economy. In this regard, we must accept that the common good should prevail over the sectorial interests.

For the market to function freely and effectively we need to eliminate rigidities that are only of benefit to the few.

Although the market needs to be allowed to function freely, we need to understand that human resources are key to our economy. Moody’s credit rating may be an irrelevance if our economy continues to maintain a healthy growth rate.

This is why we all need to put our heads together for the benefit of the real economy.

What comes to mind is a statement once made by Pope John XXIII when the Christian Democratic Party was about to form a coalition with the Socialist Party in Italy. He said that it is not important where two people are coming from. What is important is where they are going. And our common direction has to be the growth of the real economy for the benefit of all.